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April 26, 2023
Guaranteed Maximum Price (GMP) contracts are becoming a popular choice in the construction industry, offering a balance between cost control and flexibility. These contracts guarantee a maximum price for a construction project while allowing room for design and scope changes during the process. This makes them especially useful for projects where specifications may evolve as the project progresses.
What is a Guaranteed Maximum Price (GMP) Contract?
A GMP contract is an agreement where the contractor commits to completing a construction project within a set maximum price. This price is negotiated between the contractor and the client, ensuring that the client will not face unexpected cost overruns. However, if the project costs come in below the agreed maximum, the contractor can pass those savings on to the client. This structure encourages the contractor to find cost-effective solutions and efficiencies during the project.
Key Benefits of GMP Contracts for Construction Projects
- Cost Control: The primary benefit of a GMP contract is that it gives the client a clear understanding of the maximum possible cost, eliminating the risk of surprise budget increases. With this transparency, clients can plan their finances with confidence.
- Flexibility: Unlike traditional contracts that lock the contractor into a fixed scope of work, GMP contracts offer more flexibility. Contractors can work with the client to make design changes and adapt to evolving project needs, all while staying within the agreed budget.
- Cost Savings Incentive: If the project comes in under budget, the client can benefit from the savings, creating a strong incentive for the contractor to optimize resources and reduce costs wherever possible.
How Do GMP Contracts Work?
In a typical GMP contract, the scope of work is defined, but there is often room for adjustments. The contractor and client agree on a maximum price, which the contractor cannot exceed, regardless of unforeseen circumstances. If the final cost is less than the GMP, the client gets the benefit of those savings, while the contractor may retain a share, depending on the contract’s terms.
For example, if the project’s total cost is $10 million, but the contractor completes it for $9 million, the savings can either be split or entirely passed on to the client, depending on the terms of the contract.
Managing Risk with GMP Contracts: A Win-Win Solution
A GMP contract helps manage risk for both the contractor and the client.
- For the Client: They are assured that the cost will not exceed the agreed-upon maximum price, protecting them from unexpected cost overruns. This is especially important in complex or large-scale projects where price fluctuations are more likely.
- For the Contractor: They are shielded from losses exceeding the GMP, as they are not required to cover costs beyond the agreed amount. This allows them to focus on efficiently managing the project within the set price.
Tips for Successfully Implementing a GMP Contract
- Clear Communication: Both parties must define the scope, timeline, and deliverables upfront. While flexibility is a key advantage, it’s important to minimize misunderstandings by setting clear expectations from the start.
- Monitoring and Documentation: Throughout the project, both parties should maintain detailed records of costs, changes, and decisions. This ensures that the terms of the contract are being followed and helps resolve any disputes that may arise.
- Incentivize Efficiency: A well-structured GMP contract can encourage the contractor to work efficiently, knowing that any cost savings benefit both parties. Consider adding performance bonuses or incentives for further cost reduction.
The Value of GMP Contracts in Construction
Guaranteed Maximum Price (GMP) contracts are an effective way to control construction costs while offering flexibility in design and project scope. By setting a maximum price, clients are protected from cost overruns, and contractors have the opportunity to share in any savings. This balanced approach makes GMP contracts a valuable tool for managing risk, ensuring that projects are completed on time, within budget, and to the client’s specifications.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.